Tilted Forum Project Discussion Community - View Single Post - Bailout Fails. DOW Plunges 778 points. What do you think?

Cynthetiq · 09-30-2008, 07:45 AM

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Originally Posted by flstf

I hope you are right. I guess we will soon see if any companies are unable to expand or make payroll. Hopefully the president, both candidates, and most of the so called economic experts are wrong. It is kind of scary though to see what were considered to be conservative companies that have been in business hundreds of years go belly up. It seems like every day we hear of a few more and it is beginning to look like a landslide. I thought I heard the other day that Buffett was scarfing up some of the failures.

Unable to expand? Make Payroll?

making payroll is important but also having a solvent company wherein your assets and liabilities aren't like any normal person living paycheck to paycheck.

If such a company exists, well, IMO they shouldn't. They are not credit worthy and shouldn't be extended credit. It's that simple.

As far as expansion, well, when credit is tight it is tight. If some bank is willing to take the risk then it's all good, but just because a business wants to expand doesn't mean it should be allowed to because it wants to.
-----Added 30/9/2008 at 11 : 53 : 21-----

Quote:

View: Let Risk-Taking Financial Institutions Fail
Source: Time
posted with the TFP thread generator

Let Risk-Taking Financial Institutions Fail
Monday, Sep. 29, 2008
Let Risk-Taking Financial Institutions Fail
By Ari J. Officer and Lawrence H. Officer

The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

— Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

I read this arcticle and completely agree with it. I don't think that I should assume the risk for some bad bettors out there. They took the risk they get the gains, they don't share them with me. Why should they take the risk, and I take the penalty also?

This is their faults, no better than junk bonds. They wrote junk mortgages, sold them to mortgage derivatives, and resold and repackaged, etc. etc. I didn't buy any of those in my portfolio. Why am I supposed to clean up their mess?